How to Win With Weekly Options
Weeklies allow investors to fine-tune their trading time frame
There are many benefits to buying options, namely limited losses and theoretically unlimited gains. But for investors looking to "customize" their trade to capitalize on -- or hedge against -- near-term moves, many turn to weekly options. Below, we discuss the benefits of trading these short-term option contracts.
The most popular stocks and exchange-traded funds (ETFs) have options expiring every Friday, not just 12 times a year, as with monthly options. A weekly option is bought and sold much like a monthly option, but the trading time frame can be "fine-tuned" for maximum precision. This makes them them ideal for a number of reasons.
For starters, a trader can maximize leverage on short-term market moves. For instance, if an investor thinks an event next week may spark a brief dip or a spike in the underlying stock price, but he doesn't see the change affecting the equity's longer-term direction, he may choose to buy a weekly option instead of a standard December option. Buying weekly options instead of monthly would decrease his exposure to time decay, so he's not paying for time premium he doesn't need.
Conversely, a trader can hedge against an unfavorable short-term move -- perhaps in the wake of an earnings report -- by purchasing weekly protective puts on a stock or ETF he owns. This allows the speculator to protect his investment in the near term, without shelling out the higher time value for a longer-term put option.
And weekly options can also be attractive for premium sellers. Selling weekly puts and calls over a time frame of days allows traders to capitalize on expected levels of technical or options-related support and resistance -- or to profit from over-inflated implied volatility -- while giving the underlying stock less time to move against you.
In conclusion, there are many reasons to add weekly options to your repertoire, including the ability to capitalize on short-term moves, minimize the effects of time decay, and hedge event-related risk. As always, traders should carefully consider implied and historical volatility levels to avoid overpaying for extrinsic value.